Horace Mann Educators Corporation (HMN - Free Report) and its units recently witnessed senior debt rating and insurance financial strength ratings (IFS) being upgraded by Moody’s Investors Service. The credit rating giant has raised the senior debt rating of Horace Mann to Baa2 from Baa3 while the IFS ratings of its property-casualty (P&C) units and Horace Mann Life Insurance Company have been upgraded to A2 from A3. The outlook for the aforementioned ratings remained stable. The ratings upgrades represent the Multi line insurer’s solid risk-adjusted capitalization, low financial leverage, robust coverage metrics and its strong market share when it comes to offering insurance products to teachers and school administrators.
Ratings Representation of the Multi Line Insurer’s Senior Debt Rating
The credit rating agency maintains that the Multi line insurer’s senior debt rating represents the diversified revenues and earnings performance from both P&C and Life companies, healthy dividend capacity and modest financial flexibility. Moody's estimates the insurer to manage its shareholder capital returns wisely that will not meaningfully de-capitalize its operating subsidiaries.
The rating agency’s expectation of the group’s ability to maintain a solid capital adequacy, decent financial leverage and high interest coverage are denoted by the stable outlook.
Notably, factors leading to a rating upgrade include an upgrade of the financial strength ratings of the company's lead operating P&C and/or life companies and the financial leverage being below 15% with earnings coverage of interest being consistently 8x or greater.
Conversely, factors that could cause a downgrade are a downgrade of the financial strength ratings of the company's lead operating P&C and/or life companies as well as the financial leverage exceeding 25% or interest coverage being persistently less than 4x.
Ratings Representation of the P&C Units
The ratings upgrade of the insurer’s P&C operating units signifies the group’s niche market focus with regard to helping the educator community, strong balance sheet, a top-notch investment portfolio, solid loss reserves along with its capability to cross sell or bundle P&C products with life insurance and annuity products.
The credit rating giant has notified certain factors that could lead to an upgrade, including an overall combined ratio in the range of mid to high 90s or lower through the cycle, substantial profitable growth in educator auto policy counts and 1-in-250 year net aggregate modeled loss less than 15% of P&C policyholders' surplus.
Meanwhile, rating downgrade can happen due to sustained combined ratios above 100%, a noticeable decline in auto policy counts or a decline in surplus of more than 10% over a 12-month period.
Ratings Representation of Horace Mann Life Insurance Company
Unique position within the K-12 403(b) retirement plan market, decent profitability as well as solid capital adequacy are represented by the rating upgrade. Of late, the life insurance units sustained life sales volume together with a strong fee-based pension sales momentum, which the rating agency anticipates to lead to material incremental sales and earnings over time. These upsides are represented by the rating upgrade.
Certain factors that could lead to a rating upgrade are owing to consistent growth in new and total 403(b) deposits, resulting in a substantial increase in market share while maintaining profitability, better product diversity and profitability being consistently above 10% with continuing earnings stability.
On the flip side, factors that could induce a downgrade include weakening of its 403(b) franchise with a consistent decline in sales and total premiums, dwindling profitability or increasing asset risk.
Rating affirmations or upgrades from credit rating agencies play an important role in retaining investor confidence as well as maintaining credit worthiness of a stock. Whereas rating downgrades not only hamper business but also increase the cost of future debt issuances. We believe that such ratings will help Horace Mann retain investors’ faith and write more businesses going forward.
Zacks Rank and Share Price Movement
Currently, Horace Mann carries a Zacks Rank #4 (Sell). Shares of the company have gained nearly 9% in a year’s time against the industry’s decrease of 4.1%. We expect premium growth, rising Life sales volume and a solid capital position to drive the stock higher in the near term.
Stocks to Consider
Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) , Primerca, Inc. (PRI - Free Report) and The Navigators Group, Inc. (NAVG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the trailing four quarters with an average beat of 17.61%.
Primerica distributes financial products to middle-income households in the United States and Canada. The company pulled off positive surprises in three of the previous four quarters with an average positive surprise of 5.89%.
Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company came up with positive surprises in three of the preceding four quarters with an average earnings surprise of 19.54%.
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